estimated tax penalty / form 2210 / Rev. Rul. 78-158 / trust distributions in next year

[NCperson]

@tagteam   Okay, I am going to continue to play Devil’s Advocate here. 

@jtax - Please read below. Even if you took the 65 day election, it appears it is still as if you received it on Dec 31.  

<<the beneficiary of an estate or trust must take into account his distributable share of income from the estate or trust for the applicable period (whether or not actually distributed) if the trust or estate is required to distribute income to him currently.>>

If the distributions are required by the terms of the trust, then the beneficiary needs to take that into account when completing form 2210.  It doesn’t matter that the distribution occurred in the first 65 days of the following year – because the statement above says “whether or not actually distributed”.

that leaves the situation where the distribution is not required to be distributed currently: 

<<If the estate or trust is not required to distribute income currently, only the amounts actually distributed to the beneficiary during such period must be taken into account.>>

What are the amounts "actually distributed"?

Doesn't the rule below encompass 'actually distributed' monies? It states an amount properly paid or credited is to be considered part of the preceding year!  So if it was actually distributed in the first 65 days of the following year, it shall be considered paid or credited on the last day of the preceding taxable year (so December 31)  which means it is part of the estimated payment due on January 15 of the following year).

<<If within the first 65 days of any taxable year of an estate or a trust, an amount is properly paid or credited, such amount shall be considered paid or credited on the last day of the preceding taxable year.>>

I do not find anything in the form 2210 instructions that permit the beneficiary to exclude these 65-day post December 31 taxable income payments from the trustee to the beneficiary from the beneficiary's calculation of the under payment penalty, regardless of whether the distributions were required or not. 

can you point me where in the 2210 instructions the OP's distribution can be excluded? the fact is if they were paid or credited within 65 days of the end of the year, and therefore they are to be considered paid on Dec 31, which is prior to the January 15 estimated payment due date. 

[jtax]

@NCperson  you quoted:

<<the beneficiary of an estate or trust must take into account his distributable share of income from the estate or trust for the applicable period (whether or not actually distributed) if the trust or estate is required to distribute income to him currently.>>

It is subtle but as @tagteam assumed and I confirmed, the trust in question was not required to distribute the income. The income distribution was discretionary. Therefore it is covered by the cited reg and revenue ruling. Rev. Rule 78-158 -- https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev-rul-78-158/dd40 --  summarizes this by holding:

Section 6654(d)(2) of the Code provides that the addition to the tax for underpayment of any installment of estimated tax shall not be imposed [if the usual exceptions occur - payment of X% of the ultimate tax or the Y% of the prior-year liability.]

Section 1.6654-2(d)(3) of the regulations provides that in determining the applicability of the exceptions in question only the amounts actually distributed to the beneficiary during the period must be taken into account if the trust is not required to distribute income currently.

In the instant situation, the trustees are not required to distribute income to the beneficiaries currently, nor are the amounts received by the beneficiaries under the sixty-five day relation back rule of 663(b) of the Code actually distributed during the taxable year to which such amounts relate.

Accordingly, for purposes of applying the exceptions in sections 6654(d)(2) and 6654(d)(3) of the Code to the addition to the tax for underpayment of estimated tax in the instant case, amounts [of income] deemed to have been received under the sixty-five day relation back rule of section 663(b) need not be considered in determining the applicability of such exceptions.

(emphasis added)

As @tagteam points out tax (or any other legal) analysis needs to start with the statute involved, then any relevant regulations promulgated, followed by any case law interpreting those. Administrative publications and positions have various weight of authority. Revenue Rules and Procedures can be citied as binding authority. Others such as Private Letter Rulings, Chief Counsel Advice memos, and Forms, Publications, etc. are persuasive authority only and not binding. An error in forms or instructions misstating a statutory rule cannot allow a taxpayer to get out of the statutory rule. 

See https://njsea.org/files/u-s-federal-tax-law-hierarchy-quick-reference-chart.pdf

[jtax]

@NCperson , wrote

Where is the source that states  (I can't find one) that says the distribution from a trust received in that post Dec 31 period is removed from what constitutes 90% of the current year tax liability?  

That is indeed the question. My just posted reply quotes from the authority that I cited in my first post.

[jtax]

@jtax wrote:

@NCperson 

>did you check box C on form 2210? 

No.

>then you can manually adjust any input fields necessary and that would not be 'overriding' the software. 

I'm not sure that works. I think all that does is to omit the 2210 from your return and let the IRS computers calculate the penalty based on their records.

@NCperson I misunderstood. When I looked for 2210 box C I first saw the TT box C at the top (forms view). All that does is to omit the 2210 from the return.

But I now see you were referring to the checkbox on form 2210 part II. That says that the annualized method reduces the penalty. But here that doesn't really work. TT expects the total of each periods income to match the annual income. But because of the reg/rev rul we have discussed a part of the 2023 income is not deemed to be income for estimated tax penalty purposes. Adjusting input fields will not change the calculated numbers in schedule AI, part I, col (d), which cannot even be override. TT assumes any income not entered in col(a)-(c) occurred after Aug 31.

Thank you for the suggestion.

[jtax]

@tagteam 

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One approach would be to manually adjust the figures on Form 2210 (required installments) and provide an explanatory statement with the return whereby the normal installments would be specified and then the reduction due to Section 1.6654-2(d)(3) would be subtracted therefrom.

Of course, you would write something like "See Attached Statement" on your 2210.

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To close the loop on this. TT would not allow efiling with an override and I would have at least felt uneasy doing that, so I filed on paper with an override of the required annual payment to the amount w/o any of the trust distributions (and an explanation statement).

Just over two weeks after mailing I have received the expected refund. Should the Service reduce the amount later I will be happy to dispute that assessment by letter. Much easier than trying to get them to issue a refund.

Thank you for your assistance.